TY - JOUR
AU - Obstfeld,Maurice
AU - Rogoff,Kenneth
TI - Ruling Out Nonstationary Speculative Bubbles
JF - National Bureau of Economic Research Working Paper Series
VL - No. 1601
PY - 1985
Y2 - April 1985
DO - 10.3386/w1601
UR - http://www.nber.org/papers/w1601
L1 - http://www.nber.org/papers/w1601.pdf
N1 - Author contact info:
Maurice Obstfeld
Department of Economics
University of California, Berkeley
530 Evans Hall #3880
Berkeley, CA 94720-3880
Tel: 510/643-9646
Fax: 510/642-6615
E-Mail: MObstfeld@imf.org
Kenneth S. Rogoff
Thomas D Cabot Professor of Public Policy
Economics Department
Harvard University
Littauer Center 216
Cambridge, MA 02138-3001
Tel: 617-495-4022
Fax: 617/495-7730
E-Mail: krogoff@harvard.edu
AB - There is a large and growing empirical literature that tests forthe existence of asset-price bubbles or "sunspot" equilibria -- equilibria unrelated to market fundamentals. Our view is that even tests for non-stationary asset-price bubbles should not be interpreted as such. In the present paper we extend earlier work of ours which provided a strong case for ruling out nonstationary speculative price bubbles in models based on individual maximizing behavior. In the first part of the paper we study the possibility of stochastic exploding price-level bubbles of the kind proposed by Blanchard (1979). As in our previous work, a scheme of fractionally backing the currency with real outputis sufficient to preclude such bubbles. In the second part of the paper we examine conditions for ruling out implosive price-level bubbles, equilibrium paths along which the price level asymptotes to zero even though the monetary growth rate is constant. A condition on preference simplied by any reasonable monetary transactions technology is sufficient to prevent such bubbles from emerging. Given that anticipated future disturbances can lead to price paths which are qualitatively indistinguishable from bubble paths, and given the strong theoretical basis for ruling out nonstatioflary bubbles, our conclusion is that any "positive" evidence of bubbles should be regarded only as evidence of omitted variables.
ER -